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Taking Indiana’s Economic Temperature

An economist weighs in on where Indiana ‘compares favorably’ to other states, among other topics.

by MARK AREND

The Indiana Business Review (IBR), a publication of the Indiana Business Research Center at IU’s Kelley School of Business, predicts economic growth for the state in the year ahead. But will it be slow and steady growth or something more robust? And how is Indiana doing relative to other Midwest manufacturing states? Ryan M. Brewer, Ph.D., Associate Professor of Finance, Indiana University Division of Business, Indiana University–Purdue University Columbus, has some thoughts and analysis on those topics and others. Following are excerpts from his article, “Indiana’s Outlook for 2018,” which appears in IBR’s Winter 2017 edition:

On economic performance:

For 2018, we expect to see growth between 2.0 percent and 2.8 percent. Whether we end up near the higher end of the scale or the lower end … depends on several external factors, such as U.S. tax reform, Federal Reserve action, free trade agreements, immigration labor policies, international stability and inflation, as well as other factors more within the control of Hoosier leaders.

Although recent years have produced slow economic growth without much variance, growth experienced during the recovery here in Indiana certainly has not knocked us out of our economic socks. In spite of our slow growth, Indiana’s numbers have generally compared favorably to those of other states. Over the last seven years (2009 to 2016), Indiana’s seven-year growth in chained-dollar, or “real,” gross domestic product (gross state product, or GSP) has ranked 15th in the country at 14.7 percent (2.0 percent annual growth), according to the U.S. Bureau of Economic Analysis. The U.S. leader over the period has been North Dakota, with 46.6 percent real growth achieved over the seven-year period — but it’s difficult to compete with oil shale fields and a new oil pipeline.

Among our 10 peer states who are either heavy manufacturers, neighboring states or both, Michigan comes in first with a seven-year GSP growth of 18.6 percent. Ohio was second at 15.2 percent, and Iowa at 15.1 percent. Indiana was fourth (14.7 percent), followed by Oregon (14.4 percent), Wisconsin (11.5 percent), Kentucky (10.7 percent), North Carolina (10.3 percent), Illinois (8.5 percent) and Louisiana (-2.5 percent).

On the private sector’s contribution to gross state product:

In Indiana, the lion’s share of GSP aggregates from compensation and returns to capital generated by the various industries across the state, each having a unique performance profile, with government in our state taking a small share of total output. In 2015, the private sector of the Hoosier state accounted for 91 percent of economic activity, while the government comprised the other 9 percent. As a comparison, the United States’ private sector measured at 88 percent of total output, with government expenditures coming in at 12 percent, implying government’s share of economic activity for the U.S. as a whole is 33 percent higher than the level of government in Indiana.

In fact, Indiana ranks first in the nation in this way at 91.0 percent of GSP attributable to the private sector. Pennsylvania follows in second place at 90.4 percent private, with Delaware at 90.3 percent, Illinois at 90.2 percent and Minnesota at 90.2 percent. Predictably, the District of Columbia comprises the largest component of government output among all U.S. regions with its private sector coming in lowest of all, at 65.9 percent. The most government-loaded states are New Mexico (77.8 percent private), Hawaii (78.4 percent private), Maryland (79.5 percent private), Alaska (81.4 percent private) and Virginia (81.7 percent private).

“Growth experienced during the recovery here in Indiana certainly has not knocked us out of our economic socks. In spite of our slow growth, Indiana’s numbers have generally compared favorably to those of other states.”

Starting with the bad news, agriculture expects to be down 19 percent for 2017, yet also expects to rise by 2.1 percent in 2018. It is worth noting that agriculture was up 20.7 percent in 2016. As mentioned above, agriculture comprises only 1.3 percent of the total economy of Indiana, so the impact of rises and falls in this sector may not be material on the whole. Other sectors expecting to see real negative growth include information (this includes publishing, motion pictures, broadcasting, telecommunications and internet publishing), which expects to see a 0.7 percent decline in 2017 followed by a 0.4 percent decline in 2018, as well as education, which expects to see a 1.0 percent decline in 2017 followed by a 1.6 percent increase in 2018.

A risk for economic growth in Indiana is that durable goods manufacturing is expecting to see headwinds through 2018, as we approach what some feel will be a plateau in North American auto and light truck sales. Buoyed by robust new car and light truck sales increases between 2010 and 2016, the recovery from the Great Recession in Indiana has been supported, with steady increases all decade, leading to nearly 17.6 million auto units sold in 2016, representing the highest number of units sold in history. Forecasts for 2017 and 2018 auto sales in the U.S. are mixed. Forecasts from auto industry experts prior to the recent hurricane season expected to see declines in new car and light truck sales this year and next.

Indiana is generally on track for economic growth in 2018, likely somewhere between 2.0 percent and 2.8 percent.

Yet, with a hurricane effect bump arising from the roughly 500,000 cars and trucks that were destroyed by Hurricane Harvey in Texas in summer 2017, this industry expects to gain traction. Annualized September 2017 sales numbers in the U.S. were 18.9 million, yet this is, of course, unsustainable. The temporary sales increase should materialize between September and December 2017, and somewhat during the first part of 2018, as damaged cars are replaced. The record level of sales in the U.S. in 2016 may ultimately be the automotive plateau some have been suggesting, while 2017 numbers are expected to be less, in spite of the hurricane bump. The nearly decade-long auto sales expansion is finally beginning to show some signs of age and higher mileage.

In conclusion:

Indiana is generally on track for economic growth in 2018, likely somewhere between 2.0 percent and 2.8 percent … Indiana leaders may want to consider the following concerns:

Indiana is heavily invested in automotive production, and many experts believe new auto and light truck sales are poised to achieve slow to near zero growth in 2018.

Indiana appears to be approaching full employment, discouraging optimism for sufficient labor force growth to keep pace with demand.

The current opioid epidemic threatens to exacerbate jobs growth given already tight labor markets across Indiana.

Indiana income growth is predicated on increasing its focus on workforce readiness through higher education, where it ranks 42nd in the nation, providing considerable room for improvement.

A Blueprint for 2018

Just because Indiana had a banner year in 2017 where new jobs are concerned, and just because state leadership expects to see about 1 million more jobs created in the next decade, now is no time to be complacent. That’s the gist of Gov. Eric Holcomb’s 2018 Next Level Agenda, which he outlined in Indianapolis on November 8th. The Hoosier State gained nearly 29,000 new jobs last year, noted the governor.

“In 2018, I will remain sharply focused on building our workforce and other key issues that affect Hoosiers most — jobs, economic growth, health, infrastructure, and government service. I look forward to working closely with state lawmakers and other stakeholders in the year ahead to advance this plan.”

The 2018 Next Level Agenda includes five pillars outlining both legislative and administrative priorities for the year ahead. Following is an outline of the Agenda from the governor’s office:

3. Develop a 21st Century skilled and ready workforce. The 2018 action items outlined in Gov. Holcomb’s education and workforce plan were created with three guiding principles in mind:

Provide every Hoosier child an effective baseline education infused with skills and attributes that prepare them for life after high school.

Ensure students graduate from high school set on a pathway that prepares them for college, career training or a quality job.

Connect working-age adults to education and training that leads them directly to employment aligned with industry needs.

To accomplish these goals, the state will build the framework for the new system through the Governor’s Education to Career Pathway Cabinet, enabling plans, resources and operations to be locally determined and managed.

4. Attack the Drug Epidemic. Gov. Holcomb’s agenda continues Indiana’s attack on the opioid epidemic by strengthening enforcement, expanding recovery options and making it easier for Hoosiers to locate and access treatment. Additionally, the 2018 Next Level Agenda calls for improved reporting and monitoring as well as a stronger focus on programs that help reduce infant mortality rates in our state.

5. Deliver Great Government Service. Great government service remains the cornerstone of Gov. Holcomb’s Next Level Agenda. With that in mind, Indiana will continue its history of strong financial management and maintain healthy reserves in 2018. The agenda also calls for a new parental leave policy for state employees, streamlined and simplified processes for citizens to interact with state government, and better outcomes from large-scale IT projects to improve state government service.

Indiana Project Watch

In late February, GEICO announced plans to expand its operations in central Indiana, creating up to 1,474 new jobs by the end of 2022. The Washington, D.C.-based automotive insurer will invest more than $16 million to expand and enhance its 109,000-sq.-ft. (10,100-sq.-m.) space in Carmel to accommodate its growth plans. The company’s office will nearly double in size after an expansion that will add an additional 104,000 sq. ft. (9,660 sq. m.), allowing GEICO to add information technology (IT) and claims positions to its existing sales, service and emergency roadside operations.

Axiscades: 500 committed jobs in Bartholomew County and others statewide

HMD Trucking: 500 committed jobs in Lake County

Beijing West Industries (BWI) North America: 441 committed jobs in Hancock County

Grand Design RV: 416 committed jobs in Elkhart County

Liberty Mutual: 400 jobs in Hamilton County

KAR Auction Services: 400 jobs in Hamilton County

Knowledge Services: 400 jobs in Hamilton County

Mark ArendEditor in Chief of Site Selection magazine

Mark Arend has been editor in chief of Site Selection magazine since 2001. Prior to joining the editorial staff in 1997, he worked for 10 years in New York City at Wall Street Computer Review, ABA Banking Journal and Global Investment Technology. Mark graduated from the University of Hartford (Conn.) in 1985 and lives near Atlanta, Georgia.